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KPN shares drop on dividend cut, costly licenses

The logo of Dutch telecoms group KPN is seen in Haarlem May 31, 2012. REUTERS/Paul Vreeker/United
The logo of Dutch telecoms group KPN is seen in Haarlem May 31, 2012. REUTERS/Paul Vreeker/United

By Sara Webb

AMSTERDAM (Reuters) - Shares in Dutch telecoms group KPN, now part of Mexican tycoon Carlos Slim's empire, plunged as much as 15 percent after it cut its dividend for this year and next to meet the higher-than-expected cost of new mobile licenses.

A new player, Sweden's Tele2, also won licenses in Friday's Dutch auction of 4G wireless spectrum, a move likely to increase competition in one of Europe's most lucrative telecoms markets as the winners roll out faster services that allow users to watch video and surf the Internet on the move.

"This is negative news for KPN as we estimate KPN generates about 15-20 percent of group EBITDA (core earnings) from its mobile business in the Netherlands," ING analyst Emmanuel Carlier said on Monday.

The fallout from the auction is the latest blow for KPN after cut-throat competition in text messaging and slowing European economies led it to cut profit and dividend forecasts, its chief financial officer abruptly left and competition authorities launched a probe into possible price fixing.

Some analysts also questioned whether the dividend cut would be enough, suggesting the group might have to sell assets or raise capital to fend off credit rating downgrades.

At 7:30 a.m. ET, KPN shares were down 13.7 percent at 3.997 euros, the second-biggest fall by a European blue-chip stock. The stock briefly touched 3.9 euros, matching a 10-year low hit in November.

The Dutch spectrum auction raised 3.8 billion euros ($5 billion) for state coffers, well above the 800 million euros or so that analysts had predicted.

"This has negative implications for all mobile players in the market," Exane BNP Paribas analysts said in a research note, adding it would raise concerns about the cost of ongoing and upcoming auctions in the rest of Europe.

Slim's investments in European telecoms in KPN and Telekom Austria are below the valuations he bought them and the firms are the worst performers on the European telecoms index this year. KPN, in which Slim's America Movil owns 28 percent, is down 50 percent. Telekom Austria down is 41 percent.

RIGHTS ISSUE?

KPN said on Friday it had paid 1.35 billion euros for 15 separate 4G wireless licenses in the Dutch auction, much higher than the 400-500 million euros analysts had expected. Incumbents Vodafone and Deutsche Telekom also won licenses.

As a result, KPN warned it would not pay a final dividend for 2012 and would pay out only 0.03 euro per share for 2013, far lower than already reduced forecasts. The Dutch group had previously cut its dividend forecast for this year to 0.35 euro from an initial 0.90 euros.

KPN had been planning a payout for 2013 of at least 0.35 euro. However, traders and analysts have long expressed concern about the ability of KPN to pay dividends given it has a debt to core profit ratio exceeding its own targets.

Deutsche Bank analyst Matthew Bloxham warned KPN would end 2012 with a ratio of net debt to EBITDA (earnings before interest, tax, depreciation and amortization) of 2.8 times, above KPN's target of 2.5 times.

"We expect leverage to remain above 2.5 times until 2016, assuming a zero dividend policy is maintained until then. We will now have to wait and see if this negative surprise encourages the rating agencies to downgrade KPN's credit rating of Baa2/BBB and, if so, what implications there could be for management's open mind on a possible capital increase," he said.

Fitch, one of the agencies, on Monday cut its credit rating for KPN to BBB- from BBB.

KPN has already been under pressure to sell off non-core assets to keep debt levels under control. Separately on Monday, it said it had sold its Spanish operations to France Telecom, but did not disclose the financial terms of the deal.

In November, KPN agreed to sell some of its German mobile towers for 393 million euros. But it was forced to call off the sale in August of its Belgian mobile business BASE, which it had hoped would raise up to 1.8 billion euros, saying the offers it received were too low.

"If KPN cannot find a buyer for BASE or a partner for network synergies in Germany, then we believe that a rights issue might be the only option left to cut debt," said analysts at Raymond James Euro Equities in a note.

(Reporting by Sara Webb; Editing by Erica Billingham and Mark Potter)

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